Indiana Dept. of State Revenue v. Felix

• Decision Date: 16 May 1991
• Docket Number: Nos. 49S00-8905-CV-388,49S02-8906-CV-499,s. 49S00-8905-CV-388
• Citation: 571 N.E.2d 287
• Parties: INDIANA DEPARTMENT OF STATE REVENUE et al., Appellants and Cross-Appellees, (Defendants Below), v. R. Powell FELIX, individually and on behalf of all others similarly situated, Appellees and Cross-Appellants, (Plaintiffs Below). INDIANA DEPARTMENT OF STATE REVENUE, Appellant and Cross-Appellee, (Defendant Below), v. Russell T. and Mary R. CLARKE, Appellees and Cross-Appellants, (Plaintiffs Below).
• Court: Indiana Supreme Court

Page 287

571 N.E.2d 287

INDIANA DEPARTMENT OF STATE REVENUE et al., Appellants and Cross-Appellees, (Defendants Below), v. R. Powell FELIX, individually and on behalf of all others

similarly situated, Appellees and

Cross-Appellants, (Plaintiffs Below).

INDIANA DEPARTMENT OF STATE REVENUE, Appellant and Cross-Appellee, (Defendant Below), v. Russell T. and Mary R. CLARKE, Appellees and

Cross-Appellants, (Plaintiffs Below).

Nos. 49S00-8905-CV-388, 49S02-8906-CV-499.

Supreme Court of Indiana.

May 16, 1991.

Marilyn Meighen, Deputy Atty. Gen., Michael B. Cracraft, Harry F. Todd, Hackman McClarnon Hulett & Cracraft, Indianapolis, for appellants and cross-appellees.

James E. Hughes, Sommer & Barnard, Kent Emswiller, Russell T. Clarke, Jr., Emswiller, Williams, Noland & Clarke, Indianapolis, Richard A. Allen, Andrew R. Plump, Zuckert, Scoutt & Rasenberger, Washington, D.C., for appellees and cross-appellants.

SHEPARD, Chief Justice.

R. Powell Felix and Russell T. and Mary R. Clarke filed separate actions challenging the constitutionality of Indiana's intangibles tax. They contended that the tax violated the commerce clause of the United States Constitution, U.S. Const. art. I, sec. 8, cl. 3, and the uniform taxation provisions in article 10, section 1 of the Indiana Constitution. The Marion Superior Court declared the intangibles tax unconstitutional under both the federal and state constitutions. We reverse.

Case History

From 1983 to 1987, Felix paid at least $20.90 in intangibles tax on shares owned in a money market fund of Merrill Lynch Pierce Fenner and Smith of Delaware. He first filed suit in Johnson Circuit Court on December 24, 1984, seeking a preliminary injunction against collection of the Indiana intangibles tax. ¹ In the alternative, he sought an order assigning tax collections to an interest-bearing escrow account pending outcome of the suit. His suit was dismissed on August 9, 1985. That dismissal was affirmed on the grounds that Felix failed to exhaust his administrative remedy, by not filing a claim for refund with the Department of Revenue. Felix v. Indiana Dep't of State Revenue (1986), Ind.App., 502 N.E.2d 119, 120. Felix did file a claim on June 3, 1985; it was denied on December 2, 1985.

The Clarkes filed an action on March 27, 1985, in Marion Circuit Court, to contest $28.00 in intangibles taxes paid in 1981. Their claim for refund had been rejected by the Department of State Revenue on March 11, 1985. The Clarkes moved from the state in 1982.

After the Johnson Circuit Court dismissed Felix's case and Felix filed his refund claim, the Clarkes moved to amend their complaint for the purpose of adding Felix as a plaintiff. At the same time, they filed motions seeking a preliminary injunction or an escrow account to hold taxes collected and requesting class certification. All motions were denied.

Felix subsequently filed a separate action in Marion Superior Court on March 25, 1986. The Clarke case was later consolidated with this case in Marion Superior Court. Felix filed a motion seeking an escrow account and requesting class certification on June 23, 1986. The court certified the class on March 18, 1987. Relying on the State's argument that the plaintiffs had an adequate remedy for refunds under Indiana Code Sec. 6-8.1-9-1 if successful on the merits, the court denied the motion for an escrow account on June 27, 1987.

On November 10, 1988, the trial court issued its judgment in both cases on cross-motions for summary judgment. The court reaffirmed that Felix adequately represented the class and held the tax violated both the federal and state constitutions. It ordered all taxes paid on or after June 23, 1987, refunded with interest.

The court rejected Felix's claim for a refund of all taxes paid after June 3, 1982. It limited the retroactivity of relief using the criteria of Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971). The court found in part that refunding over $300,000,000 in taxes dating back to 1981 or 1982 would be an inequitable hardship on the State with no remedial effect. After both sides filed motions to correct errors, the trial court changed the effective date for refunds to May 1, 1987, the date the State presented its "adequate remedy" argument in response to the plaintiffs' motion to establish an escrow account.

In 1989, the legislature repealed the intangibles tax retroactive to November 10, 1988. Pub.L. No. 80-1989, Secs. 18-19, 1989 Ind. Acts 912, 919. The legislature also enacted new law prescribing requirements for taxpayer class actions. Pub.L. No. 91-1989, Sec. 2, 1989 Ind.Acts 953, 954 (codified at Ind.Code Sec. 6-8.1-9-7 (West Supp.1990)).

Both sides appeal decisions of the trial court. They present us with five issues:

I. Does the intangibles tax violate the commerce clause of the U.S. Constitution?

II. Does the intangibles tax violate the uniformity provisions of article 10, section 1 of the Indiana Constitution?

III. Did the trial court err in rejecting the plaintiffs' claims under 42 U.S.C. Secs. 1983, 1988?

IV. Should the trial court's judgment be retroactive and, if so, to what date?

V. Did the trial court err in deciding the Clarke and Felix motions for class certification?

I. The Commerce Clause

Eighty years ago, this Court and the United States Supreme Court sustained a virtually identical version of the Indiana intangibles tax against a commerce clause challenge. Darnell v. State (1910), 174 Ind. 143, 90 N.E. 769, aff'd, Darnell v. Indiana, 226 U.S. 390, 33 S.Ct. 120, 57 L.Ed. 267 (1912). Appellants claim the trial court erroneously ignored this controlling precedent. Appellees contend that more recent Supreme Court commerce clause cases have superseded Darnell. We find Darnell controlling.

The Seventh Circuit has recently outlined an analysis for assessing the legal weight of a relatively old decision of the Supreme Court. Levine v. Heffernan, 864 F.2d 457 (7th Cir.1988), cert. denied, --- U.S. ----, 110 S.Ct. 204, 107 L.Ed.2d 157 (1989). The court found that "the two essential issues relating to [the case's] precedential effect [are] whether the decision has been implicitly overruled and, if not, whether it is factually distinguishable from [the case at bar]." 864 F.2d at 460. Heffernan is based on the premise that only the Supreme Court may overrule one of its own precedents. 864 F.2d at 461; see also Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 484, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989) ("If a precedent of this Court has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the Court of Appeals should follow the case which directly controls, leaving to this Court the prerogative of overruling its own decisions.").

We believe Heffernan presents an excellent way of analyzing questions such as the commerce clause question in this case. Inasmuch as the validity of Indiana's intangibles tax under the commerce clause was resolved in Darnell v. Indiana, the decision in Darnell should control this litigation unless it is clear either that (1) Darnell has been implicitly overruled by subsequent Supreme Court decisions, or (2) that Darnell is still good law but factually distinguishable from the instant case.

Isaac Darnell owned shares of capital stock in a Tennessee corporation. Indiana citizens at that time were liable for taxes on all property not expressly exempted from taxation. See, e.g., ch. XXIX, Sec. 30, 1903 Ind.Acts 49, 70 (personal property); ch. XCIX, Sec. 3, 1891 Ind.Acts 199 (all property). Under chapter XXIX, Sec. 32, 1903 Ind.Acts at 74, Indiana residents had to report for tax purposes "[a]ll shares of stock in any corporation formed outside of this State; and also all shares of stock in any corporation formed in this State and conducting its business outside of this State." Indiana sued Darnell for taxes owed on the value of his shares. Darnell contested the tax, claiming that it discriminated "in favor of domestic stocks as against shares in a foreign corporation, and that a resident owning stock in a domestic corporation escapes taxation thereon, while his next-door neighbor owning shares of stock in a foreign corporation is required to pay taxes on his holdings." 174 Ind. at 153-54, 90 N.E. at 773. Darnell claimed this discrimination violated the commerce clause of the U.S. Constitution. Id. at 154, 90 N.E. at 773.

The Indiana Supreme Court upheld the predecessor to the present intangibles tax. This Court found that the purpose of the Indiana tax law was "to require all property to contribute pro rata its share of taxes, and so far as practicable to avoid double taxation." Id. at 156, 90 N.E. at 774. The Court further noted that:

Domestic corporations are taxed upon all their property.... The State, in its discretion, might tax the shares of stock in such corporation to the individual owners thereof residing in this State, but it would in a sense be double taxation, and it has not been the policy of this State to do so. Shares of stock in a foreign corporation doing business in another state, owned and held by a resident of this State, are taxed because they have not been and cannot be otherwise taxed by this State.... The man who resides in a state and enjoys the benefit of its schools, churches, society, highways and other public accommodations, as well as its governmental protection over his person and property, is in no position to complain when required to contribute by taxation ratably upon his property for the maintenance of these institutions and the local government. It is clear to our minds that the tax law of Indiana is not open to the charge of discrimination against stock in foreign corporations, but imposes only just and equal burdens upon all corporate stocks, without regard to the place of incorporating or of conducting the corporate business, and does not violate either the third clause of article...